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Retirement Income Strategies

While much of the academic literature on managing investments for retirement income strategies is instructive, in many instances, the methods and means for taking withdrawals are too complex or removed from the real-world circumstances and needs of everyday retirees.

When considering drawing up a retirement income plan, the client’s primary objective (e.g., capital preservation, maximizing success probability, maximizing income, minimizing downside risk, etc.) must remain at the center of any blueprint.

To achieve optimal results in the context of client objectives, the construction of a retirement income plan demands a level of creativity that integrates the full range of appropriate investments and investment products.

A Bespoke Approach to Retirement Income Planning

One of the chief risks retirees face is drawing down on assets while markets are in correction or bear market territory, which can accelerate the depletion of retirement savings.

Since the average bear market lasts about 14 months and takes about two years to fully recover1, clients may want to create a “bridge” portfolio to mitigate the risk of falling into this bear market “trap” by considering:

A five-year term certain annuity to fund near-term income needs, which provides guaranteed income, while ensuring assets are not tapped during down market cycles. After the five years are up? Buy another five-year term annuity.

A bond ladder with principal investments equal to annual income needs so that each step of the ladder matures in time to fund a new year of retirement. What to do with the interest payments? Either use it to maintain purchasing power or reinvest it.

Placing five years of income into cash.

Of course, the predominant client fear is longevity risk. While an immediate annuity solves this problem, most individuals are reluctant to surrender a substantial share of net worth to an insurance company should they die early. One possible solution? Buy a deferred annuity with the intention of annuitizing at age 80. While the retiree lives off of investment assets for the first 15 years (success probability is quite high for this length of time), the annuity can grow untapped and remain in the client’s estate. Once the designated age arrives, re-evaluate whether annuitization still makes sense. Remember, if investment assets run out early, the retiree can take non-annuitized withdrawals, or annuitize.

Alternatively, if a client wishes to maximize wealth transfer to heirs while retaining income security, consider purchasing a lifetime annuity—with an inflation rider—to fund the income goal and leave the remaining assets to grow for the next 20-30 years in retirement.

Investment professionals may argue that none of these strategies will likely match the terminal wealth potential of a more conventional investment strategy, but that’s no longer the point, is it? The perspective is now different; it’s much more about reducing financial surprises and leaving a desired legacy, than it is about outperforming the Joneses.